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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2002
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 0-19603
CENTENNIAL COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1242753
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3349 Route 138
Wall, NJ 07719
(Address of principal executive offices, including zip code)
(732) 556-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock - 95,696,036 outstanding shares as of January 9, 2003
TABLE OF CONTENTS
Part I - Financial Information................................................................................ 1
Item 1. Financial Statements................................................................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 41
Item 4. Controls and Procedures.............................................................................. 41
Part II - Other Information................................................................................... 42
Item 1. Legal Proceedings................................................................................... 42
Item 2. Changes in Securities and Use of Proceeds........................................................... 42
Item 3. Defaults Upon Senior Securities..................................................................... 42
Item 4. Submission of Matters to a Vote of Security Holders................................................. 42
Item 5. Other Information................................................................................... 43
Item 6. Exhibits and Reports on Form 8-K.................................................................... 43
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30,
2002 MAY 31,
(UNAUDITED) 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,482 $ 33,871
Accounts receivable, less allowance for doubtful accounts of
$22,050 and $15,883, respectively 82,196 88,776
Inventory - phones and accessories, less allowance for obsolescence
of $2,456 and $2,775, respectively 12,557 12,138
Prepaid expenses and other current assets 33,226 20,884
----------- -----------
Total Current Assets 178,461 155,669
Property, plant and equipment, net 694,132 741,293
Equity investments in wireless systems, net 2,528 2,443
Debt issuance costs, less accumulated amortization of $30,704 and $26,858,
respectively 39,692 43,554
U.S. wireless licenses 371,766 326,711
Caribbean wireless licenses, less accumulated amortization of
$10,766 and $10,266, respectively 71,992 72,492
Cable franchise costs 217,293 193,021
Goodwill 27,984 27,984
Other assets, net 39,105 44,342
----------- -----------
TOTAL ASSETS $ 1,642,953 $ 1,607,509
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 78,512 $ 65,795
Accounts payable 31,654 30,504
Accrued expenses and other current liabilities 175,054 154,599
Payable to affiliates 125 125
----------- -----------
Total Current Liabilities 285,345 251,023
Long-term debt 1,683,920 1,742,722
Deferred federal income taxes 140,819 70,777
Minority interest in subsidiaries 805 976
Other liabilities 14,911 12,946
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock par value $0.01 per share: 150,000,000 shares authorized;
95,766,539 and 95,482,191 shares issued, respectively; and 95,696,036
and 95,411,688 shares outstanding, respectively 958 955
Additional paid-in capital 437,018 436,273
Accumulated deficit (913,229) (899,514)
Accumulated other comprehensive loss (6,493) (7,522)
----------- -----------
(481,746) (469,808)
Less: cost of 70,503 common shares in treasury (1,077) (1,077)
Deferred compensation (24) (50)
----------- -----------
Total Stockholders' Equity (Deficit) (482,847) (470,935)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,642,953 $ 1,607,509
=========== ===========
See notes to condensed consolidated financial statements
1
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue:
Service revenue $ 174,616 $ 168,739 $ 361,238 $ 336,688
Equipment sales 6,103 4,630 11,375 10,845
--------- --------- --------- ---------
180,719 173,369 372,613 347,533
--------- --------- --------- ---------
Costs and Expenses:
Cost of equipment sold 15,535 13,022 30,706 25,879
Cost of services 37,863 41,652 80,131 82,062
Sales and marketing 23,625 27,173 47,456 53,071
General and administrative 37,907 32,999 72,726 65,126
Depreciation and amortization 34,646 38,097 71,127 72,375
Loss (gain) on disposition of assets 482 (11) (1,893) (11)
--------- --------- --------- ---------
150,058 152,932 300,253 298,502
--------- --------- --------- ---------
Operating income 30,661 20,437 72,360 49,031
--------- --------- --------- ---------
Income from equity investments 79 187 133 332
Interest expense, net (36,994) (38,102) (75,267) (76,030)
Other (99) (25) (106) 48
--------- --------- --------- ---------
Loss before income taxes and minority interest (6,353) (17,503) (2,880) (26,619)
Income tax expense (7,241) (7,113) (11,006) (10,783)
--------- --------- --------- ---------
Loss before minority interest (13,594) (24,616) (13,886) (37,402)
Minority interest in loss of subsidiaries 120 4,290 171 8,360
--------- --------- --------- ---------
Net loss $ (13,474) $ (20,326) $ (13,715) $ (29,042)
========= ========= ========= =========
Loss per share:
Basic and diluted $ (0.14) $ (0.21) $ (0.14) $ (0.31)
========= ========= ========= =========
Weighted-average number of shares outstanding:
Basic and diluted 95,668 95,183 95,544 95,054
========= ========= ========= =========
See notes to condensed consolidated financial statements.
2
CENTENNIAL COMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
---------------------------
NOVEMBER 30, NOVEMBER 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (13,715) $ (29,042)
--------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 71,127 72,375
Minority interest in loss of subsidiaries (171) (8,360)
Deferred income taxes -- 7,789
Income from equity investments (133) (332)
Gain on disposition of assets (1,893) (11)
Changes in assets and liabilities, net of effects of acquisitions
and dispositions and other 40,839 (17,156)
--------- ---------
Total adjustments 109,769 54,305
--------- ---------
Net cash provided by operating activities 96,054 25,263
--------- ---------
INVESTING ACTIVITIES:
Proceeds from disposition of assets, net of cash expenses 7,540 43
Capital expenditures (67,518) (130,767)
Distribution received from equity investments 48 43
Deposits on long-term assets -- (15,000)
--------- ---------
Net cash used in investing activities (59,930) (145,681)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt 27,173 146,055
Repayment of debt (47,169) (41,624)
Debt issuance costs paid -- (4,000)
Proceeds from the exercise of stock options -- 1,414
Proceeds from issuance of common stock under employee stock
purchase plan 483 1,898
Capital contributed from minority interests in subsidiaries -- 2,450
--------- ---------
Net cash (used in) provided by financing activities (19,513) 106,193
--------- ---------
Net decrease in cash and cash equivalents 16,611 (14,225)
Cash and cash equivalents, beginning of period 33,871 23,345
--------- ---------
Cash and cash equivalents, end of period $ 50,482 $ 9,120
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 55,791 $ 67,477
========= =========
Income taxes paid $ 5,212 $ 2,401
========= =========
NON-CASH TRANSACTIONS:
Paid-in-kind interest $ 12,514 $ --
========= =========
Fixed assets acquired under capital leases $ 5,209 $ --
========= =========
Compensation paid in stock $ 244 $ --
========= =========
See notes to condensed consolidated financial statements
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands, except subscriber, share and per share data)
NOTE 1. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the consolidated
financial position of Centennial Communications Corp. and Subsidiaries (the
"Company") as of November 30, 2002 and the results of its consolidated
operations and cash flows for the three and six months ended November 30, 2002
and 2001. These financial statements do not include all disclosures required by
accounting principles generally accepted in the United States of America. The
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's May 31, 2002 Annual
Report on Form 10-K, which includes a summary of significant accounting policies
and other disclosures. The consolidated balance sheet at May 31, 2002 is
audited.
Reclassifications:
Certain prior year information has been reclassified to conform to the current
year presentation.
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill and
intangibles with indefinite lives from an amortization method to an
impairment-only approach. Goodwill and other intangible assets with indefinite
lives will remain on the balance sheet and not be amortized. On an annual basis,
and when there is reason to suspect that their values have been diminished or
impaired, these assets must be tested for impairment, and write-downs may be
necessary. The Company adopted SFAS No. 142 on June 1, 2002.
In conjunction with the adoption of SFAS No. 142, the Company has reassessed the
useful lives of previously recognized intangible assets. A significant portion
of the Company's intangible assets are licenses, including licenses associated
with equity method investments, that provide the Company's wireless operations
with the exclusive right to utilize the radio frequency spectrum designated on
the license to provide wireless communication services. While wireless licenses
are issued for only a fixed time, generally ten years, the U.S. wireless and
Puerto Rico PCS licenses are subject to renewal by the Federal Communications
Commission ("FCC"). Historically, renewals of licenses through the FCC have
occurred routinely and at nominal cost. Moreover, the Company has determined
that there are currently no legal, regulatory, contractual, competitive,
economic or other factors that limit the useful life of its U.S. wireless and
Puerto Rico PCS licenses. The Company's cable franchises in Puerto Rico are
issued for either ten or twenty-year periods, and are subject to renewal by the
Puerto Rico Telecom Board ("PRTB"). The PRTB's process for granting cable
franchise renewals is routine and renewals are more likely than not to be
granted. Additionally, the Company has determined that there are currently no
legal, regulatory, contractual, competitive, economic or other factors that
limit the useful life of its Puerto Rico cable franchises. As a result, the U.S.
wireless and Puerto Rico PCS licenses and the cable franchise costs will be
treated as indefinite-lived intangible assets under the provisions of SFAS No.
142 and will not be amortized but rather will be tested for impairment. The
Company will reevaluate the useful life
4
determination for U.S. wireless and Puerto Rico PCS licenses and Puerto Rico
cable franchise costs each reporting period to determine whether events and
circumstances continue to support an indefinite useful life.
Previous wireless and cable business combinations have been for the purpose of
acquiring existing licenses and related infrastructure to enable the Company to
build out its existing networks. The primary assets acquired in such
combinations have been wireless licenses and cable franchises. In the allocation
of the purchase price of certain of these previous acquisitions, amounts
classified as goodwill have related predominately to the deferred tax effects of
the acquired U.S. wireless licenses and cable franchise costs. Except for these
deferred tax effects, the excess of the purchase price over the other acquired
net assets was accounted for as U.S. wireless and cable franchises. The Company
believes that the nature of its U.S. wireless licenses and related goodwill and
its cable franchises and related goodwill are fundamentally indistinguishable.
Prior to the adoption of SFAS No. 142, the Company amortized both U.S. wireless
licenses and the related goodwill, and cable franchise costs and the related
goodwill over the same respective periods using the straight-line method.
In conjunction with the adoption of SFAS No. 142, the Company reclassified
approximately $67,583 of U.S. wireless goodwill to U.S. wireless licenses and
approximately $37,965 of Caribbean Broadband goodwill to cable franchise costs.
Amounts for fiscal year 2002 have been reclassified to conform to the
presentation adopted on June 1, 2002. In connection with these
reclassifications, the Company recorded an additional deferred tax liability of
$69,327 as of June 1, 2002, in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes". The offsetting increase related to recognizing
this deferred tax liability was recorded to U.S. wireless licenses and cable
franchise costs, consistent with the approach of treating U.S. wireless licenses
and cable franchise costs of $45,055 and $24,272, respectively, as the excess in
the purchase price allocations for transactions in which the predominant assets
acquired were U.S. wireless licenses and cable franchises. This
reclassification, including the related impact of deferred taxes, had no affect
on the Company's results of operations.
As a result of the adoption of SFAS No. 142, previously recognized goodwill and
other intangible assets with indefinite lives will no longer be amortized but
will be subject to impairment tests. When testing the carrying value of these
assets for impairment, the Company will determine, within each operation, the
fair value of aggregated indefinite-lived intangible assets by subtracting from
each operations' discounted cash flows the fair value of all of the other net
tangible and intangible assets of each operation. Depreciation and amortization
expense for the six months ended November 30, 2002 would have been approximately
$12,449 higher in the absence of SFAS No. 142. The aggregate effect of ceasing
amortization decreased net loss and loss per basic and diluted share by $9,170
and $0.10, respectively.
5
The following tables present the impact of SFAS No. 142 on reported net loss and
loss per share had the standard been in effect for the first six months of
fiscal 2002:
NOVEMBER 30, NOVEMBER 30,
2002 2001
------------ ------------
Reported net loss $(13,715) $(29,042)
Goodwill amortization -- 2,216
U.S. wireless licenses amortization -- 3,467
Caribbean wireless licenses amortization - Puerto Rico -- 510
Cable franchise costs amortization -- 3,855
-------- --------
Adjusted net loss $(13,715) $(18,994)
======== ========
NOVEMBER 30, NOVEMBER 30,
2002 2001
------------ ------------
Reported basic and diluted loss per share $ (0.14) $ (0.31)
Goodwill amortization -- 0.02
U.S. Wireless licenses amortization -- 0.04
Caribbean Wireless licenses amortization - Puerto Rico -- 0.01
Cable franchise costs amortization -- 0.04
-------- --------
Adjusted basic and diluted loss per share $ (0.14) $ (0.20)
======== ========
Goodwill
The goodwill balance of $27,984 at November 30, 2002 and May 31, 2002 is
recorded in the Caribbean Broadband segment.
Other Intangible Assets
The major components of the Company's other acquired intangible assets follows:
OTHER INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
AS OF AS OF
NOVEMBER 30, MAY 31,
2002 2002
------------ --------
U.S. wireless licenses $371,766 $326,711
Caribbean wireless licenses - Puerto Rico 54,159 54,159
Cable franchise costs 217,293 193,021
-------- --------
Total $643,218 $573,891
======== ========
6
OTHER INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
AS OF NOVEMBER 30, 2002 AS OF MAY 31, 2002
------------------------ -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Caribbean wireless licenses - Dominican
Republic $20,000 $ 2,167 $20,000 $ 1,667
Customer lists 49,611 24,894 49,611 19,396
Transmission and connecting rights 2,192 1,220 2,192 1,177
Cable facility 6,000 1,430 6,000 1,310
------- ------- ------- -------
Total $77,803 $29,711 $77,803 $23,550
======= ======= ======= =======
Intangible assets amortization expense was $6,412 for the six months ended
November 30, 2002. It is estimated to be $6,412 for the remainder of fiscal
2003, $11,342 in 2004, $7,167 in 2005, $4,263 in 2006 and $1,472 in 2007.
NOTE 3. DEBT
Long-term debt consists of the following:
NOVEMBER 30, MAY 31,
2002 2002
----------- -----------
Term Loans $ 983,618 $ 1,009,120
Revolving Credit Facility 200,000 200,000
10 3/4% Subordinated Debt due 2008 370,000 370,000
Mezzanine Debt 188,361 174,529
Lucent Credit Facility -- 43,233
Capital Lease Obligations 5,456 --
Cable TV Credit Facility 13,562 9,187
10 1/8% Senior Notes due 2005 219 219
Other 1,216 2,229
----------- -----------
Total Long-Term Debt 1,762,432 1,808,517
Current Portion of Long-Term Debt (78,512) (65,795)
----------- -----------
Net Long-Term Debt $ 1,683,920 $ 1,742,722
=========== ===========
On September 5, 2001, the Company amended its bank credit facility (the "New
Credit Facility") to add an additional $50,000 to the Tranche-C term loan. The
New Credit Facility consists of four term loans with an original aggregate
principal amount of $1,050,000, which has been reduced to $983,618 as of
November 30, 2002 due to mandatory debt amortization repayments. The borrowers
under the New Credit Facility are Centennial Cellular Operating Co. LLC for a
term loan with an original amount of $325,000, of which $292,500 was outstanding
as of November 30, 2002, and Centennial Puerto Rico Operations Corp. for three
separate term loans aggregating an original amount of $725,000, of which
$691,118 was outstanding as of November 30, 2002. The New Credit Facility also
includes a revolving credit facility with an aggregate principal amount of
$250,000, of which $200,000 was outstanding as of November 30, 2002. The
revolving credit facility portion of the New Credit Facility is available to
both
7
of the borrowers. The Company's obligations under the New Credit Facility are
guaranteed by substantially all of the Company's subsidiaries and are
collateralized by liens on substantially all of the Company's assets.
In January 2002, Centennial Puerto Rico Cable TV Corp. ("Centennial Cable"), a
wholly-owned subsidiary of the Company, entered into a $15,000 credit agreement
with Banco Popular de Puerto Rico (the "Cable TV Credit Facility") to fund the
digital conversion of its cable operations. Borrowings under the Cable TV Credit
Facility bear interest at LIBOR plus 3.50%. The Cable TV Credit Facility matures
in February 2006 and principal repayments began in August 2002. Under the Cable
TV Credit Facility, Centennial Cable is required to maintain certain financial
covenants and is limited in its ability to, among other things, incur additional
indebtedness. Centennial Puerto Rico Operations Corp. has guaranteed Centennial
Cable's obligation under the Cable TV Credit Facility and the facility is
collateralized by a lien on the digital boxes, the monthly rental payments on
the digital boxes and other equipment purchased with the borrowings under the
Cable TV Credit Facility. As of November 30, 2002, $13,562 was outstanding under
the Cable TV Credit Facility.
In 1999, the Company issued $180,000 Mezzanine Debt and common shares of the
Company. All of the Mezzanine Debt is currently held by an affiliate of Welsh,
Carson, Anderson & Stowe ("WCAS"). The issuance has been allocated $157,500 to
debt and $22,500 to equity. The difference between the face value of the
Mezzanine Debt and the amount allocated to debt is being amortized over the term
of the Mezzanine Debt. The Mezzanine Debt bears cash interest at a rate of 10%
or paid-in-kind interest at a rate of 13% per annum.
The Company has been informed by the administrative agent under the New Credit
Facility that, as of May 31, 2002, it has used up all remaining baskets under
the New Credit Facility to pay cash interest on the Mezzanine Debt and that any
additional payments of cash interest on the Mezzanine Debt would be considered a
default under the New Credit Facility. Accordingly, the Company is effectively
prohibited from making any further payments of cash interest on the Mezzanine
Debt, absent additional distributions from the equity investments in wireless
systems that it holds. As such, the Company is recording paid-in-kind interest
at a rate of 13% per annum, which increases the principal amount of the
Mezzanine Debt. Interest amounts for future periods will be calculated on these
higher principal amounts. Any unpaid interest will be repaid upon maturity of
the Mezzanine Debt.
The aggregate annual principal payments for the next five years and thereafter
under the Company's debt at November 30, 2002, are summarized as follows:
November 30, 2003 $ 78,512
November 30, 2004 101,028
November 30, 2005 123,689
November 30, 2006 344,185
November 30, 2007 555,426
November 30, 2008 and thereafter 559,592
----------
$1,762,432
==========
The Company was in compliance with all covenants of its debt agreements at
November 30, 2002.
8
Interest expense, as reflected in the financial statements, has been partially
offset by interest income. The gross interest expense for the six months ended
November 30, 2002 and 2001 was $75,865 and $76,627, respectively.
During the six months ended November 30, 2002, the Company recorded a reduction
of $1,029, net of tax, to other comprehensive loss attributable to fair value
adjustments of interest rate swap and collar agreements. The Company also
decreased its liabilities by $1,719 as a result of adjusting the carrying
amounts of its derivatives to reflect their fair values at November 30, 2002.
NOTE 4. DISPOSITIONS
In August 2002, the Company entered into an agreement to sell its 60% interest
in Infochannel Limited, a Jamaican Internet service provider for $3,000, of
which $1,000 was received as a deposit as of August 31, 2002. The Infochannel
transaction is expected to close by the end of fiscal year 2003.
In August 2002, the Company sold its 51% interest in its Jamaica wireless
operations, Centennial Digital Jamaica, to Oceanic Digital Communications Inc.,
the 49% shareholder of Centennial Digital Jamaica. The Company recorded a
pre-tax gain of $2,370, which is included in gain on disposition of assets in
the consolidated statement of operations. The Company reduced its net
liabilities by $2,370, including consolidated long-term debt of approximately
$45,100 (largely comprised of the vendor financing credit facility with Lucent
Technologies, which was non-recourse to the Company) as a result of this
transaction.
During the three months ended November 30, 2002, the Company sold 41
telecommunications towers in a sale-leaseback transaction to AAT Communications
Corp. ("AAT") for approximately $6,525. The $3,876 gain recorded on these sales
has been deferred and will be recognized over the lives of the related
capitalized leases (see Note 6).
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible long-lived
assets. The Company is required to implement SFAS No. 143 on June 1, 2003, and
has not yet determined the impact that this statement will have on its results
of operations or financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and establishes accounting and reporting standards for long-lived assets to
be disposed of by sale. This standard applies to all long-lived assets,
including discontinued operations. SFAS No. 144 requires that those assets be
measured at the lower of carrying amount or fair value less cost to sell. SFAS
No. 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity that will be eliminated from the ongoing operations of the entity
in a disposal transaction. The Company adopted SFAS No. 144 on June 1, 2002. The
adoption of this statement did not have a material effect on the Company's
results of operations, financial position and cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Statement No. 145 provides for the
9
rescission of several previously issued accounting standards, new accounting
guidance for the accounting for certain lease modifications and various
technical corrections that are not substantive in nature to existing
pronouncements. The Company adopted SFAS No. 145 on June 1, 2002. The adoption
of this statement did not have a material effect on the Company's results of
operations, financial position and cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by SFAS No. 146 include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002, with early application encouraged. The Company has not yet determined
the impact that this standard will have on its results of operations or
financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 serves as an amendment to
SFAS No. 123, "Accounting for Stock-Based Compensation", and provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As required by SFAS No. 148, the Company will adopt
the transition elements and annual financial statement reporting requirements
for the current fiscal year ending May 31, 2003. The Company will adopt the
interim periods reporting disclosure requirements of SFAS No. 148 during the
interim period ending August 31, 2003. The Company has not yet determined the
impact that this standard will have on its results of operations or financial
position.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In August 2002, WCAS advised the Company that during the quarter ended August
31, 2002, an affiliate of WCAS (the "WCAS Affiliate") purchased in open market
transactions approximately $140,000 principal amount of the Company's 10-3/4%
senior subordinated notes due 2008 (the "Notes"). During the quarter ended
November 30, 2002, the WCAS Affiliate advised the Company that it purchased an
additional approximately $13,000 principal amount of the Notes. Together with
the previous purchases, the WCAS Affiliate holds approximately $189,000
principal amount of the Notes as of November 30, 2002. On September 24, 2002,
the Company and the WCAS Affiliate entered into an indemnification agreement
pursuant to which the WCAS Affiliate agreed to indemnify the Company in respect
of taxes which may become payable by the Company as a result of these purchases.
In connection with these transactions, the Company recorded a $15,925 income tax
payable included in accrued expenses and other current liabilities, and a
corresponding amount due from the WCAS Affiliate that is included in prepaid
expenses and other current assets.
In May 2002, the Company announced that it entered into an agreement with AAT to
sell to AAT 186 telecommunications towers located in its U.S. wireless serving
areas for a purchase price of approximately $34,100 in cash, subject to
adjustment. Under the terms of the agreement, the Company will leaseback space
on the towers from AAT. The agreement is subject to customary closing conditions
and the tower sales are expected to close on a rolling basis during the
remainder of fiscal year 2003. During the three months ended November 30, 2002,
the Company sold 41 towers to AAT in a sale-
10
leaseback transaction for approximately $6,525. The $3,876 gain recorded on
these sales has been deferred and will be recognized over the lives of the
related capitalized leases.
The Company recently entered into multi-year roaming agreements with Cingular
Wireless and AT&T Wireless for analog, TDMA and GSM traffic. Under these
agreements, the Company is required to overlay its existing U.S. wireless
network with a GSM network over the next three years. The Company expects the
GSM overlay will require incremental expenditures, above its historical U.S.
wireless capital expenditure levels, of approximately $20,000 to $40,000 over
the next three years and is in the process of selecting a vendor or vendors to
provide the necessary equipment and services.
In July 2001, the Company entered into an agreement with Nortel Networks
pursuant to which it agreed, subject to certain conditions, to purchase
equipment and installation services for its wireless operations through June
2003 at a cost of approximately $40.0 million. The Company has committed to
purchase $30.9 million under this agreement as of November 30, 2002.
NOTE 7. SEGMENT INFORMATION
The Company's consolidated financial statements include three distinct business
segments: Caribbean Wireless, Caribbean Broadband and U.S. Wireless. The Company
determines its segments based on the types of services offered and geographic
location. Caribbean Wireless represents the Company's wireless operations in
Puerto Rico, the Dominican Republic and the U.S. Virgin Islands. Caribbean
Wireless also includes the Company's wireless operations in Jamaica until the
disposition of those operations in August 2002. Caribbean Broadband represents
the Company's offering of broadband services including switched voice, dedicated
(private line), video and other services in Puerto Rico, the Dominican Republic
and Jamaica. U.S. Wireless represents the Company's wireless systems in the
United States that it owns and manages. The Company measures the operating
performance of each segment based on adjusted EBITDA. Adjusted EBITDA is defined
as earnings before gain on disposition of assets, minority interest in loss of
subsidiaries, income from equity investments, interest expense - net, income
taxes, depreciation and amortization and a $5 million non-cash charge that
related to prior fiscal years.
11
Information about the Company's operations in its three business segments as of
and for the six months ended November 30, 2002 and 2001 is as follows:
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
2002 2001
----------- -----------
Caribbean Wireless
Service revenue $ 122,141 $ 102,762
Equipment sales 5,131 4,890
----------- -----------
Total revenue 127,272 107,652
Adjusted EBITDA 43,856 37,733
Total assets 381,174 479,403
Capital expenditures 25,435 72,154
Caribbean Broadband
Switched revenue $ 16,241 $ 11,803
Dedicated revenue 18,370 15,890
Video revenue 24,695 23,835
Other revenue 11,202 15,880
----------- -----------
Total revenue 70,508 67,408
Adjusted EBITDA 18,067 13,358
Total assets 622,560 632,396
Capital expenditures 23,897 38,333
U.S. Wireless
Service revenue $ 129,198 $ 121,386
Roaming revenue 44,132 48,922
Equipment sales 6,026 5,771
----------- -----------
Total revenue 179,356 176,079
Adjusted EBITDA 84,669 70,304
Total assets 1,896,779 1,794,521
Capital expenditures 18,186 20,280
Eliminations
Total revenue (1) $ (4,523) $ (3,606)
Total assets (2) (1,257,560) (1,234,538)
Consolidated
Total revenue $ 372,613 $ 347,533
Adjusted EBITDA 146,594 121,395
Total assets 1,642,953 1,671,782
Capital expenditures 67,518 130,767
(1) Elimination of intercompany revenue, primarily from Caribbean Broadband to
Caribbean Wireless.
(2) Elimination of intercompany investments.
12
Reconciliation of Loss before Income Taxes and Minority Interest:
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------
2002 2001
--------- -----------
Adjusted EBITDA for reportable segments $ 146,594 $ 121,395
Interest expense, net (75,267) (76,030)
Depreciation and amortization (71,127) (72,375)
Income from equity investments 133 332
Gain on disposition of assets 1,893 11
Non-cash charge (5,000) --
Other (106) 48
--------- ---------
Loss before income taxes and minority interest $ (2,880) $ (26,619)
========= =========
NOTE 8. CONDENSED CONSOLIDATING FINANCIAL DATA
Centennial Cellular Operating Co. LLC ("CCOC") and Centennial Puerto Rico
Operations Corp. ("CPROC") are wholly-owned subsidiaries of the Company. CCOC is
a joint and several co-issuer on the $370,000 Subordinated Notes issued by the
Company, and CPROC has unconditionally guaranteed the Subordinated Notes.
Separate financial statements and other disclosures concerning CCOC and CPROC
are not presented because they are not material to investors.
13
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF NOVEMBER 30, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,463 $ -- $ 37,019 $ -- -- $ 50,482
Accounts receivable - net 48,739 -- 35,346 -- (1,889) 82,196
Inventory - phones and
accessories - net 3,061 -- 9,496 -- -- 12,557
Prepaid expenses and other
current assets 4,505 -- 28,721 -- -- 33,226
----------- ----------- ----------- -------------- ------------ -------------
Total current assets 69,768 -- 110,582 -- (1,889) 178,461
Property, plant & equipment -
net 266,565 -- 427,567 -- -- 694,132
Equity investments in wireless
systems - net -- -- 2,528 -- -- 2,528
Debt issuance costs - net 18,861 -- 20,831 -- -- 39,692
U.S. wireless licenses - net -- -- 371,766 -- -- 371,766
Caribbean wireless licenses -
net -- -- 71,992 -- -- 71,992
Cable franchise costs - net -- -- 217,293 -- -- 217,293
Goodwill - net 4,186 -- 23,798 -- -- 27,984
Intercompany -- 1,308,771 980,130 594,371 (2,883,272) --
Investment in subsidiaries -- (360,410) 560,212 (841,571) 641,769 --
Other assets - net 5,263 4,512 33,842 -- (4,512) 39,105
----------- ----------- ----------- -------------- ------------ -------------
Total $ 364,643 $ 952,873 $ 2,820,541 $ (247,200) $ (2,247,904) $ 1,642,953
=========== =========== =========== ============== ============ =============
14
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
(CONTINUED)
AS OF NOVEMBER 30, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 24,833 $ 48,750 $ 4,929 $ -- $ -- $ 78,512
Accounts payable 19,132 -- 13,654 -- (1,132) 31,654
Accrued expenses and other
current liabilities 33,493 -- 142,316 -- (755) 175,054
Payable to affiliates -- -- 125 -- -- 125
----------- ----------- ----------- -------------- ------------ --------------
Total current liabilities 77,458 48,750 161,024 -- (1,887) 285,345
Long-term debt 666,583 813,969 15,007 188,361 -- 1,683,920
Deferred federal income taxes -- -- 146,621 -- (5,802) 140,819
Minority interest -- -- 805 -- -- 805
Other liabilities -- 11,225 3,686 -- -- 14,911
Intercompany 25,225 920,500 1,888,817 47,290 (2,881,832) --
Stockholders' equity (deficit):
Common stock -- -- -- 958 -- 958
Preferred stock 465,000 -- -- -- (465,000) --
Additional paid-in capital (818,498) -- 1,381,551 437,018 (563,053) 437,018
Accumulated deficit (51,125) (835,078) (776,974) (913,229) 1,663,177 (913,229)
Accumulated other
comprehensive loss -- (6,493) -- (6,493) 6,493 (6,493)
----------- ----------- ----------- -------------- ------------ --------------
(404,623) (841,571) 604,577 (481,746) 641,617 (481,746)
Less: treasury shares -- -- -- (1,077) -- (1,077)
Deferred compensation -- -- 4 (28) -- (24)
----------- ----------- ----------- -------------- ------------ --------------
Total stockholders' equity
(deficit) (404,623) (841,571) 604,581 (482,851) 641,617 (482,847)
----------- ----------- ----------- -------------- ------------ --------------
Total $ 364,643 $ 952,873 $ 2,820,541 $ (247,200) $ (2,247,904) $ 1,642,953
=========== =========== =========== ============== ============ ==============
15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
Revenue $ 141,605 $ -- $ 234,274 $ -- $ (3,266) $ 372,613
----------- ----------- ----------- -------------- ------------ --------------
Costs and expenses:
Cost of equipment sold 12,124 -- 18,582 -- -- 30,706
Cost of services 23,442 -- 57,823 -- (1,134) 80,131
Sales and marketing 17,777 -- 29,679 -- -- 47,456
General and administrative 33,387 -- 41,471 -- (2,132) 72,726
Depreciation and
amortization 31,529 -- 39,598 -- -- 71,127
Loss/(gain) on disposition
of assets 476 -- (2,369) -- -- (1,893)
----------- ----------- ----------- -------------- ------------ --------------
118,735 -- 184,784 -- (3,266) 300,253
----------- ----------- ----------- -------------- ------------ --------------
Operating income 22,870 -- 49,490 -- -- 72,360
----------- ----------- ----------- -------------- ------------ --------------
Income from equity investments -- -- 133 -- -- 133
Income from investments in
subsidiaries -- 165 3,491 165 (3,821) --
Interest expense - net (19,379) (41,011) (997) (13,880) -- (75,267)
Other -- -- (106) -- -- (106)
Intercompany interest
allocation -- 41,011 (41,011) -- -- --
----------- ----------- ----------- -------------- ------------ --------------
Income (loss) before income
tax expense and minority
interest 3,491 165 11,000 (13,715) (3,821) (2,880)
Income tax expense -- -- (11,006) -- -- (11,006)
----------- ----------- ----------- -------------- ------------ --------------
Income (loss) before minority
interest 3,491 165 (6) (13,715) (3,821) (13,886)
Minority interest in loss of
subsidiaries -- -- 171 -- -- 171
----------- ----------- ----------- -------------- ------------ --------------
Net income (loss) $ 3,491 $ 165 $ 165 $ (13,715) $ (3,821) $ (13,715)
=========== =========== =========== ============== ============ ==============
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,491 $ 165 $ 165 $ (13,715) $ (3,821) $ (13,715)
----------- ----------- ----------- -------------- ------------ --------------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization 31,529 -- 39,598 -- -- 71,127
Minority interest in loss
of subsidiaries -- -- (171) -- -- (171)
Income from equity
investments -- -- (133) -- -- (133)
Equity in undistributed
earnings of subsidiaries -- (165) (3,491) (165) 3,821 --
Gain (loss) on disposition
of assets 476 -- (2,369) -- -- (1,893)
Changes in assets and
liabilities, net of
effects of acquisitions
and dispositions and
other 20,464 -- 6,251 14,124 -- 40,839
----------- ----------- ----------- -------------- ------------ --------------
Total adjustments 52,469 (165) 39,685 13,959 3,821 109,769
----------- ----------- ----------- -------------- ------------ --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 55,960 -- 39,850 244 -- 96,054
----------- ----------- ----------- -------------- ------------ --------------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of cash
expenses -- -- 7,540 -- -- 7,540
Capital returned from
equity investments -- -- 48 -- -- 48
Capital expenditures (35,786) -- (31,732) -- -- (67,518)
----------- ----------- ----------- -------------- ------------ --------------
NET CASH USED IN
INVESTING ACTIVITIES (35,786) -- (24,144) -- -- (59,930)
----------- ----------- ----------- -------------- ------------ --------------
FINANCING ACTIVITIES:
Proceeds from the issuance
of long-term debt 335 20,000 6,838 -- -- 27,173
Repayment of debt (9,290) (36,301) (1,578) -- -- (47,169)
Proceeds from issuance of
common stock under
employee stock purchase
plan -- -- -- 483 -- 483
Cash (paid to) received
from affiliates (11,295) 16,301 8,294 -- -- 13,300
Cash advances from parent
(to subsidiaries) -- -- (12,573) (727) -- (13,300)
----------- ----------- ----------- -------------- ------------ --------------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES (20,250) -- 981 (244) -- (19,513)
----------- ----------- ----------- -------------- ------------ --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (76) -- 16,688 -- 16,611
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,539 -- 20,332 -- 33,871
----------- ----------- ----------- -------------- ------------ --------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 13,463 $ -- $ 37,020 $ -- $ -- $ 50,482
=========== =========== =========== ============== ============ ==============
17
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
AS OF MAY 31, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,539 $ -- $ 20,332 $ -- $ -- $ 33,871
Accounts receivable - net 46,440 -- 43,794 -- (1,458) 88,776
Inventory - phones and
accessories - net 1,636 -- 10,502 -- -- 12,138
Prepaid expenses and other
current assets 3,966 -- 16,918 -- -- 20,884
----------- ----------- ----------- -------------- ------------ --------------
Total current assets 65,581 -- 91,546 -- (1,458) 155,669
Property, plant & equipment -
net 270,073 -- 471,220 -- -- 741,293
Equity investments in wireless
systems - net -- -- 2,443 -- -- 2,443
Debt issuance costs - net 20,884 -- 22,670 -- -- 43,554
U.S. wireless licenses - net -- -- 326,711 -- -- 326,711
Caribbean wireless licenses -
net -- -- 72,492 -- -- 72,492
Cable franchise costs - net -- -- 193,021 -- -- 193,021
Goodwill - net 4,186 -- 23,798 -- -- 27,984
Intercompany -- 1,324,446 980,084 593,824 (2,898,354) --
Investment in subsidiaries -- (360,241) 556,719 (842,768) 646,290 --
Other assets - net 5,413 5,227 38,929 -- (5,227) 44,342
----------- ----------- ----------- -------------- ------------ --------------
Total $ 366,137 $ 969,432 $ 2,779,633 $ (248,944) $ (2,258,749) $ 1,607,509
=========== =========== =========== ============== ============ ==============
18
CONDENSED CONSOLIDATING BALANCE SHEET FINANCIAL DATA
(CONTINUED)
AS OF MAY 31, 2002
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of
long-term debt $ 21,631 $ 40,625 $ 3,539 $ -- $ -- $ 65,795
Accounts payable 17,478 -- 14,076 -- (1,050) 30,504
Accrued expenses and other
current liabilities 35,077 -- 119,930 -- (408) 154,599
Payable to affiliates -- -- 125 -- -- 125
----------- ----------- ----------- -------------- ------------ --------------
Total current liabilities 74,186 40,625 137,670 -- (1,458) 251,023
Long-term debt 678,740 838,125 51,109 174,748 -- 1,742,722
Deferred federal income taxes -- -- 76,004 -- (5,227) 70,777
Minority interest -- -- 976 -- -- 976
Other liabilities -- 12,946 -- -- -- 12,946
Intercompany 21,324 920,500 1,909,449 47,243 (2,898,516) --
Stockholders' equity (deficit):
Common stock -- -- -- 955 -- 955
Preferred stock 465,000 -- -- -- (465,000) --
Additional paid-in capital (818,498) -- 1,381,565 436,273 (563,067) 436,273
Accumulated deficit (54,615) (835,242) (777,140) (899,514) 1,666,997 (899,514)
Accumulated other
comprehensive loss -- (7,522) -- (7,522) 7,522 (7,522)
----------- ----------- ----------- -------------- ------------ --------------
(408,113) (842,764) 604,425 (469,808) 646,452 (469,808)
Less: treasury shares -- -- -- (1,077) -- (1,077)
Deferred compensation -- -- -- (50) -- (50)
----------- ----------- ----------- -------------- ------------ --------------
Total stockholders' equity
(deficit) (408,113) (842,764) 604,425 (470,935) 646,452 (470,935)
----------- ----------- ----------- -------------- ------------ --------------
Total $ 366,137 $ 969,432 $ 2,779,633 $ (248,944) $ (2,258,749) $ 1,607,509
=========== =========== =========== ============== ============ ==============
19
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2001
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
Revenue $ 127,775 $ -- $ 221,507 $ -- $ (1,749) $ 347,533
----------- ----------- ----------- -------------- ------------ --------------
Costs and expenses:
Cost of equipment sold 6,706 -- 19,852 -- (679) 25,879
Cost of services 20,125 -- 62,276 -- (339) 82,062
Sales and marketing 19,661 -- 33,410 -- -- 53,071
General and administrative 25,215 -- 40,642 -- (731) 65,126
Depreciation and
amortization 26,422 -- 45,953 -- -- 72,375
Gain on disposition of
assets (5) -- (6) -- -- (11)
----------- ----------- ----------- -------------- ------------ --------------
98,124 -- 202,127 -- (1,749) 298,502
----------- ----------- ----------- -------------- ------------ --------------
Operating income 29,651 -- 19,380 -- -- 49,031
----------- ----------- ----------- -------------- ------------ --------------
Income from equity investments -- -- 332 -- -- 332
(Loss) income from investments
in subsidiaries -- (18,455) 4,516 (18,455) 32,394 --
Interest expense - net (25,135) (40,029) (279) (10,587) -- (76,030)
Other -- -- 48 -- -- 48
Intercompany interest
allocation -- 40,029 (40,029) -- -- --
----------- ----------- ----------- -------------- ------------ --------------
Income (loss) before income
tax expense and minority
interest 4,516 (18,455) (16,032) (29,042) 32,394 (26,619)
Income tax expense -- -- (10,783) -- -- (10,783)
----------- ----------- ----------- -------------- ------------ --------------
Income (loss) before minority
interest 4,516 (18,455) (26,815) (29,042) 32,394 (37,402)
Minority interest in loss of
subsidiaries -- -- 8,360 -- -- 8,360
----------- ----------- ----------- -------------- ------------ --------------
Net income (loss) $ 4,516 $ (18,455) $ (18,455) $ (29,042) $ 32,394 $ (29,042)
=========== =========== =========== ============== ============ ==============
20
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FINANCIAL DATA
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2001
(AMOUNTS IN THOUSANDS)
Centennial Centennial Centennial
Puerto Rico Cellular Centennial Communications
Operations Operating Non- Communications Corp. and
Corp. Co. LLC Guarantors Corp. Eliminations Subsidiaries
----------- ----------- ----------- -------------- ------------ --------------
OPERATING ACTIVITIES:
Net income (loss) $ 4,516 $ (18,455) $ (18,455) $ (29,042) $ 32,394 $ (29,042)
----------- ----------- ----------- -------------- ------------ --------------
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 26,422 -- 45,953 -- -- 72,375
Minority interest in loss
of subsidiaries -- -- (8,360) -- -- (8,360)
Deferred income taxes -- -- 7,789 -- -- 7,789
Income from equity
investments -- -- (332) -- -- (332)
Equity in undistributed
earnings of subsidiaries -- 18,455 (4,516) 18,455 (32,394) --
Gain on disposition of
assets (5) -- (6) -- -- (11)
Changes in assets and
liabilities, net of
effects of acquisitions
and dispositions and
other 3,437 -- (21,718) 1,125 -- (17,156)
----------- ----------- ----------- -------------- ------------ --------------
Total adjustments 29,854 18,455 18,810 19,580 (32,394) 54,305
----------- ----------- ----------- -------------- ------------ --------------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES 34,370 -- 355 (9,462) -- 25,263
----------- ----------- ----------- -------------- ------------ --------------
INVESTING ACTIVITIES:
Proceeds from disposition
of assets, net of cash
expenses 5 -- 38 -- -- 43
Capital expenditures (50,879) -- (79,888) -- -- (130,767)
Deposits on long-term
assets -- -- (15,000) -- -- (15,000)
Distributions received from
equity investments -- -- 43 -- -- 43
----------- ----------- ----------- -------------- ------------ --------------
NET CASH USED IN
INVESTING ACTIVITIES (50,874) -- (94,807) -- -- (145,681)
----------- ----------- ----------- -------------- ------------ --------------
FINANCING ACTIVITIES:
Proceeds from the issuance
of long-term debt 55,000 52,000 39,055 -- -- 146,055
Repayment of debt (7,876) (32,000) (360) (1,388) -- (41,624)
Debt issuance costs paid (4,000) -- -- -- -- (4,000)
Proceeds from the exercise
of stock options -- -- -- 1,414 -- 1,414
Proceeds from issuance of
common stock under
employee stock purchase
plan -- -- -- 1,898 -- 1,898
Capital contributed from
minority interest in
subsidiaries -- -- 2,450 -- -- 2,450
Cash received from (paid
to) affiliates (32,829) (20,000) 52,829 -- -- --
Cash advances from
subsidiaries (to parent) -- -- (7,538) 7,538 -- --
----------- ----------- ----------- -------------- ------------ --------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 10,295 -- 86,436 9,462 -- 106,193
----------- ----------- ----------- -------------- ------------ --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (6,209) -- (8,016) -- -- (14,225)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,900 -- 14,445 -- -- 23,345
----------- ----------- ----------- -------------- ------------ --------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,691 $ -- $ 6,429 $ -- $ -- $ 9,120
=========== =========== =========== ============== ============ ==============
21
NOTE 9. SUBSEQUENT EVENTS
On December 20, 2002, the Company sold 39 telecommunications towers in a
sale-leaseback transaction to AAT for approximately $6,654. The $4,418 gain
recorded on this sale will be deferred and recognized over the lives of
the related capitalized leases.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Part I, Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2002, in
addition to the interim consolidated financial statements and accompanying notes
presented in Part 1, Item 1 of this Form 10-Q.
OVERVIEW
We are a leading regional communications service provider. In the Caribbean, we
are a fully integrated communications service provider offering both wireless
and broadband services, and in the United States, we are a regional wireless
service provider in small city and rural areas. As of November 30, 2002, our
Caribbean operations own licenses to serve a population of approximately 12.9
million in Puerto Rico, the Dominican Republic and the U.S. Virgin Islands. We
provide wireless ("Caribbean Wireless") and several broadband services including
switched voice, dedicated (private line), video and other services ("Caribbean
Broadband") over our own fiber optic, coaxial and microwave network in the
Caribbean. In the United States, we own and operate wireless systems and provide
wireless service in six states in two clusters of small cities and rural areas
covering a population of approximately 6.0 million as of November 30, 2002:
Indiana/Michigan/Ohio and Texas/Louisiana/Mississippi ("U.S. Wireless"). These
clusters are adjacent to major metropolitan markets and have benefited from the
traffic generated by subscribers roaming into our coverage areas. Collectively,
our wireless licenses cover a total of 17.1 million Net Pops as of November 30,
2002.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of our
financial statements requires management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition
Wireless Revenue - We recognize wireless service revenue in the period the
service is provided to our customers. Services billed in advance are recognized
as income when earned. Revenues from sales of handsets and accessories are
recognized in the period these products are sold to the customer. We have
multiple billing cycles, all of which span our quarter-ends. As a result of our
billing cycle cut-off times, we are required to make estimates for service
revenue earned but not yet billed at the end of each quarter. These estimates
are based primarily on the actual results of the immediately preceding
comparable billing cycle. Actual billing cycle results and related revenue may
vary, depending on subscriber usage and rate plan mix, from the results
estimated at the end of each quarter. Revenues from activation fees are
recognized over the expected customer service period, ranging from 26 to 48
months. Revenues from prepaid calling cards are recognized as the customer uses
the minutes on the cards. Revenues from other services are recognized when
earned.
Broadband Revenue - We recognize revenues from cable television installation
fees to the extent of direct selling costs in the period the installation is
provided to the customer. Revenues from prepaid long
23
distance cards are recognized as the customer uses the minutes on the cards.
Revenues from other services are recognized when earned. Revenues from equipment
sales are recognized in the period these products are sold to the customer.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses, which
result from our customers not making required payments. We base our allowances
on the likelihood of recoverability of our subscriber accounts receivable based
on past experience and by reviewing current collection trends that are expected
to continue. If economic or industry trends worsen beyond our estimates, we
would increase our allowance for doubtful accounts by recording additional
expense.
Valuation of Long-Lived Assets
Long-lived assets such as property, plant and equipment, certain license costs
and customer lists are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In our
valuation, we consider current market values of properties similar to our own,
competition, prevailing economic conditions, government policy, including
taxation, and the historical and current growth patterns of both the Company and
the industry. We also consider the recoverability of the cost of our long-lived
assets based on a comparison of estimated undiscounted operating cash flows for
the businesses, which generated long-lived assets, with the carrying value of
the long-lived assets.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also sets
forth recognition criteria for intangible assets other than goodwill as well as
disclosure requirements for business combinations. We adopted SFAS No. 141 on
July 1, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill and intangibles with
indefinite lives from an amortization method to an impairment-only approach.
Goodwill and certain intangible assets will remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. We adopted SFAS No. 142 effective
June 1, 2002.
In conjunction with the adoption of SFAS No. 142, we have reassessed the useful
lives of previously recognized intangible assets. A significant portion of our
intangible assets are licenses, including licenses associated with equity method
investments, that provide our wireless operations with the exclusive right to
utilize the radio frequency spectrum designated on the license to provide
wireless communication services. While wireless licenses are issued for only a
fixed time, generally ten years, the U.S. wireless and Puerto Rico PCS licenses
are subject to renewal by the Federal Communications Commission ("FCC").
Historically, renewals of licenses through the FCC have occurred routinely and
at nominal cost. Moreover, we have determined that there are currently no legal,
regulatory, contractual, competitive, economic or other factors that limit the
useful life of our U.S. wireless and Puerto Rico PCS licenses. Our cable
franchises in Puerto Rico are issued for either ten or twenty-year periods, and
are subject to renewal by the Puerto Rico Telecom Board ("PRTB"). The PRTB's
process for granting cable franchise renewals is routine and renewals are more
likely than not to be granted. Additionally, we have determined that there are
currently no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful life of our Puerto Rico cable franchises. As a
result, the U.S. wireless and
24
Puerto Rico PCS licenses and the cable franchise costs will be treated as
indefinite-lived intangible assets under the provisions of SFAS No. 142 and will
not be amortized but rather will be tested for impairment. We will reevaluate
the useful life determination for U.S. wireless and Puerto Rico PCS licenses and
the Puerto Rico cable franchises each reporting period to determine whether
events and circumstances continue to support an indefinite useful life.
Previous wireless and cable business combinations have been for the purpose of
acquiring existing licenses and related infrastructure to enable us to build out
our existing networks. The primary asset acquired in such combinations has been
wireless licenses and cable franchises. In the allocation of the purchase price
of certain of these previous acquisitions, amounts classified as goodwill have
related predominately to the deferred tax effects of the acquired U.S. wireless
license and cable franchises. Except for these deferred tax effects, the excess
of the purchase price over the other acquired net assets was accounted for as
U.S. wireless licenses and cable franchise costs. We believe that the nature of
our U.S. wireless licenses and related goodwill and our cable franchises and the
related goodwill are fundamentally indistinguishable.
In conjunction with the adoption of SFAS No. 142, we reclassified approximately
$67.6 million of U.S. Wireless goodwill to U.S. wireless licenses and
approximately $38.0 million of Caribbean Broadband goodwill to cable franchise
costs. Amounts for fiscal year 2002 have been reclassified to conform to the
presentation adopted on June 1, 2002. In connection with these
reclassifications, we recorded an additional deferred tax liability of $69.3
million as of June 1, 2002, in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes". The offsetting increase related to recognizing
this deferred tax liability was recorded to U.S. wireless licenses and cable
franchise costs, consistent with the approach of treating U.S. wireless licenses
and cable franchise costs of $45.0 million and $24.3 million, respectively, as
the excess in the purchase price allocations for transactions in which the
predominant assets acquired were U.S. wireless and cable franchises. This
reclassification, including the related impact of deferred taxes, had no affect
on our results of operations.
As a result of the adoption of SFAS No. 142, previously recorded goodwill and
other intangible assets with indefinite lives will no longer be amortized but
will be subject to impairment tests. When testing the carrying value of these
assets for impairment, we will determine, within each operation, the fair value
of aggregated indefinite-lived intangible assets by subtracting from each
operations' discounted cash flows the fair value of all of the other net
tangible and intangible assets of each operation. Depreciation and amortization
expense for the six months ended November 30, 2002 would have been $12.4 million
higher in the absence of SFAS No. 142. The aggregate effect of ceasing
amortization decreased net loss and loss per basic and diluted share by $9.2
million and $0.10, respectively.
Derivative Financial Instruments
We use financial derivatives as part of our overall risk management strategy.
These instruments are used to manage risk related to changes in interest rates.
Our portfolio of derivative financial instruments consists of interest rate swap
and collar agreements. We use interest rate swap agreements to modify variable
rate obligations to fixed rate obligations, thereby reducing our exposure to
higher interest rates. We use interest rate collar agreements to lock in a
maximum interest rate if interest rates rise, but allow us to otherwise pay
lower market rates, subject to a floor. Amounts paid or received under interest
rate swap agreements are accrued as interest rates change with the offset
recorded in interest expense.
During the six months ended November 30, 2002, we recorded a reduction of $1.0
million, net of tax, in other comprehensive loss attributable to fair value
adjustments of interest rate swap and collar agreements. We also decreased our
liabilities by $1.7 million as a result of adjusting the carrying
25
amounts of our derivatives to reflect their fair values at November 30, 2002.
RESULTS OF OPERATIONS
We had 896,800 wireless subscribers at November 30, 2002, as compared to 826,500
at November 30, 2001, an increase of 9%. The net loss for the three and six
months ended November 30, 2002 was $13.5 million and $13.7 million,
respectively, as compared to the net loss of $20.3 million and $29.0 million for
the same periods last year. Basic and diluted loss per share for the three and
six months ended November 30, 2002 was $0.14 as compared to basic and diluted
loss per share of $0.21 and $0.31 for the three and six months ended November
30, 2001, respectively.
On August 22, 2002, we sold our 51% interest in our Jamaica wireless operations,
Centennial Digital Jamaica, to Oceanic Digital Communications Inc., the 49%
shareholder of Centennial Digital Jamaica. We recorded a pre-tax gain of $2.4
million, which is included in gain on disposition of assets in the consolidated
statement of operations. In addition, we reduced our net liabilities by
approximately $2.4 million, including consolidated long-term debt of
approximately $45.1 million (largely comprised of the vendor financing credit
facility with Lucent Technologies, which was non-recourse to the Company) as a
result of this transaction.
In August 2002, we entered into an agreement to sell our 60% interest in
Infochannel Limited, a Jamaican Internet service provider, for $3.0 million, of
which $1.0 million was received as of August 31, 2002. This transaction is
expected to close by the end of fiscal year 2003.
During the three months ended November 30, 2002, the Company sold 41 towers to
AAT in a sale-leaseback transaction for approximately $6.5 million. The $3.9
million gain recorded on these sales has been deferred and will be recognized
over the lives of the related capitalized leases.
The table below summarizes the consolidated results of operations for each
period:
Three Months Ended Six Months Ended
------------------------- ---------------------
(In thousands, except per
share amounts) 11/30/02 11/30/01 % Change 11/30/02 11/30/01 % Change
- -------------- -------- -------- -------- -------- -------- --------
Operating income $ 30,661 $ 20,437 50% $ 72,360 $ 49,031 48%
Net loss $ (13,474) $ (20,326) (34)% $ (13,715) $ (29,042) (53)%
Loss per share:
Basic $ (0.14) $ (0.21) (33)% $ (0.14) $ (0.31) (55)%
Diluted $ (0.14) $ (0.21) (33)% $ (0.14) $ (0.31) (55)%
Adjusted EBITDA (1) $ 70,789 $ 58,523 21% $ 146,594 $ 121,395 21%
(1) Earnings before gain on disposition of assets, minority interest in loss
of subsidiaries, income from equity investments, interest expense - net,
income taxes, depreciation and amortization and a $5 million non-cash
charge that related to prior fiscal years ("Adjusted EBITDA") is
presented because it is a financial indicator used in the
telecommunications industry. Our calculation of
26
Adjusted EBITDA may or may not be consistent with that of other
companies and should not be viewed as an alternative to measurements
that are accounting principles generally accepted in the United States
of America, such as operating income, net income or cash flows from
operations.
Caribbean Wireless Operations
Three Months Ended Six Months Ended
----------------------- ---------------------
(In thousands) 11/30/02 11/30/01 % Change 11/30/02 11/30/01 % Change
- -------------- -------- -------- -------- -------- -------- --------
Revenue:
Service revenue $ 59,444 $ 52,788 13% $ 122,141 $ 102,762 19%
Equipment sales 2,585 1,770 46 5,131 4,890 5
--------- --------- -- --------- --------- --
62,029 54,558 14 127,272 107,652 18
--------- --------- -- --------- --------- --
Costs and expenses:
Cost of equipment sold 8,037 3,992 101 16,943 8,586 97
Cost of services 9,434 8,645 9 21,164 16,892 25
Sales and marketing 9,898 10,437 (5) 19,809 21,533 (8)
General and administrative 11,768 11,742 0 25,500 22,908 11
--------- --------- -- --------- --------- --
39,137 34,816 12 83,416 69,919 19
--------- --------- -- --------- --------- --
Adjusted EBITDA 22,892 19,742 16 43,856 37,733 16
Loss (gain) on disposition
of assets 492 -- NA (1,878) -- NA
Non-cash charge 4,389 -- NA 4,389 -- NA
Depreciation and amortization 14,214 13,419 6 29,675 24,095 23
--------- --------- -- --------- --------- --
Operating income $ 3,797 $ 6,323 (40)% $ 11,670 $ 13,638 (14)%
========= ========= === ========= ========= ===
Revenue
Caribbean Wireless service revenue increased $6.7 million, or 13% and $19.4
million, or 19%, to $59.4 million and $122.1 million for the three and six
months ended November 30, 2002, respectively, as compared to the same periods
last year. These increases were primarily due to growth in revenue from new
subscribers of $9.6 million and $24.9 million for the three and six months ended
November 30, 2002, respectively, partially offset by decreases in service
revenue per subscriber of $3.2 million and $5.6 million for the same periods.
The increases in subscribers were partially offset by currency devaluation in
the Dominican Republic.
The increase in equipment sales of wireless telephones and accessories to
subscribers was due to an increase in Dominican Republic gross activations and a
change in the Company's handset strategy in Puerto Rico that allows customers to
choose between purchasing and leasing a phone.
Our Caribbean Wireless operations had approximately 366,700 subscribers at
November 30, 2002, an increase of 17% from the 312,600 subscribers at November
30, 2001. During the twelve months ended November 30, 2002, increases from new
activations of 211,400 were offset by subscriber cancellations of 157,300. These
activations and cancellations exclude Centennial Digital Jamaica. The 17% growth
in subscribers included approximately 16,800 additional postpaid subscribers in
the Dominican Republic, which have substantially higher revenue per average
wireless customer than prepaid customers. The
27
monthly prepaid and postpaid churn rate decreased to 3.4% for the three months
ended November 30, 2002 from 3.7% for the same period a year ago and remained
unchanged at 3.7% for the six months ended November 30, 2002 as compared to the
same period last year. The cancellations experienced by our Caribbean Wireless
operations were primarily the result of churn of prepaid customers, competitive
factors and non-payment.
Caribbean Wireless total revenue per subscriber per month, based upon an average
number of subscribers, was $57 and $58 for the three and six months ended
November 30, 2002, as compared to $59 and $61 for the same periods a year ago.
The decreases in revenue per subscriber were primarily due to a decrease in the
rate for interconnection terminating minutes in Puerto Rico, an increase in the
percentage of the Company's Caribbean wireless subscribers located in the
Dominican Republic, and currency devaluation in the Dominican Republic. The
average customer used 727 minutes of airtime per month in the second quarter of
fiscal 2003 versus 524 minutes of use per month in the same period last year.
Costs and expenses
Cost of equipment sold increased $4.0 million, or 101% and $8.4 million, or 97%
for the three and six months ended November 30, 2002, respectively, as compared
to the same periods last year, due to an increase in the number of premium
phones sold and an increase in phones used for upgrades and retention plan
exchanges.
Cost of services increased $0.8 million, or 9% and $4.3 million, or 25% during
the three and six months ended November 30, 2002, respectively, as compared to
the three and six months ended November 30, 2001, primarily due to the variable
costs associated with a larger subscription base and associated revenue, which
included higher long distance and interconnection charges.
Sales and marketing expenses decreased $0.5 million, or 5% and $1.7 million, or
8% for the three and six months ended November 30, 2002, respectively, as
compared to the same periods last year, primarily due to lower commissions paid
to agents.
General and administrative expenses were flat at $11.8 million for the three
months ended November 30, 2002, as compared to the same period in fiscal 2002.
General and administrative expenses increased $2.6 million, or 11% for the six
months ended November 30, 2002, as compared to the same period in fiscal 2002,
primarily due to higher bad debt expense in the Dominican Republic as the
Company increased its reserves in consideration of growth in the postpaid
subscriber base.
Adjusted EBITDA for the Caribbean Wireless operations for the three months ended
November 30, 2002 was $22.9 million, an increase of $3.2 million, or 16% as
compared to the three months ended November 30, 2001. Adjusted EBITDA for the
Caribbean Wireless operations for the six months ended November 30, 2002 was
$43.9 million, an increase of $6.1 million, or 16% as compared to the six months
ended November 30, 2001.
The gain on disposition of assets during the six months ended November 30, 2002
was due to the sale of our Jamaican wireless operations.
The $4.4 million non-cash charge relates to certain disputed billings that arose
in prior fiscal years, to and from the Puerto Rico Telephone Company. The
Company recorded this charge in the current quarter in consideration of recent
developments and continued protracted settlement negotiations concerning these
disputed billings.
28
Depreciation and amortization for the three months ended November 30, 2002 was
$14.2 million, an increase of $0.8 million, or 6%, as compared to the three
months ended November 30, 2001. Depreciation and amortization for the six months
ended November 30, 2002 was $29.7 million, an increase of $5.6 million, or 23%,
as compared to the six months ended November 30, 2001.
Operating income for the three months ended November 30, 2002 was $3.8 million,
a decrease of $2.5 million from the operating income of $6.3 million from the
same period last year. Operating income for the six months ended November 30,
2002 was $11.7 million, a decrease of $2.0 million from the operating income of
$13.6 million from the same period last year.
Caribbean Broadband Operations
Three Months Ended Six Months Ended
-------------------- --------------------
(In thousands) 11/30/02 11/30/01 % Change 11/30/02 11/30/01 % Change
- -------------- -------- -------- -------- -------- -------- --------
Revenue:
Switched revenue $ 8,429 $ 6,124 38 % $ 16,241 $ 11,803 38%
Dedicated revenue 9,311 8,117 15 18,370 15,890 16
Video revenue 12,031 12,256 (2) 24,695 23,835 4
Other revenue 5,019 8,990 (44) 11,202 15,880 (29)
-------- -------- --- -------- -------- ---
34,790 35,487 (2) 70,508 67,408 5
-------- -------- --- -------- -------- ---
Costs and expenses:
Cost of equipment sold 188 88 114 343 252 36
Cost of services 15,592 17,319 (10) 30,757 32,283 (5)
Sales and marketing 2,498 3,827 (35) 4,757 7,136 (33)
General and administrative 8,228 7,539 9 16,584 14,379 15
-------- -------- --- -------- -------- ---
26,506 28,773 (8) 52,441 54,050 (3)
-------- -------- --- -------- -------- ---
Adjusted EBITDA 8,284 6,714 23 18,067 13,358 35
Gain on disposition of assets (12) (7) 71 (13) (7) 86
Non-cash charge 611 -- NA 611 -- NA
Depreciation and amortization 11,030 13,281 (17) 22,813 25,766 (11)
-------- -------- --- -------- -------- ---
Operating loss $ (3,345) $ (6,560) (49)% $ (5,344) $(12,401) (57)%
======== ======== === ======== ======== ===
Revenue
Caribbean Broadband revenue decreased $0.7 million, or 2%, to $34.8 million for
the three months ended November 30, 2002, as compared to the three months ended
November 30, 2001. This change reflects the decrease in revenue from terminating
international long distance minutes to the Dominican Republic as well as the
loss of cable television subscribers due to the upgrade of our facilities to
digital and increased competition from satellite providers. The decrease in
terminating minutes to the Dominican Republic was partially offset by a 10%
increase in total access lines and equivalents to 207,255. Caribbean Broadband
revenue increased $3.1 million or 5%, to $70.5 million for the six months ended
November 30, 2002, as compared to the six months ended November 30, 2001, due
primarily to an
29
increase in switched revenue.
Switched revenue increased $2.3 million, or 38% and $4.4 million, or 38%, for
the three and six months ended November 30, 2002, as compared to the same
periods a year ago. These increases were primarily due to a 35% increase in
switched access lines to 37,129 as of the end of the second quarter from the
same period last year and a corresponding growth in minutes of use.
Dedicated revenue increased $1.2 million, or 15% and $2.5 million or 16%, to
$9.3 million and $18.4 million for the three and six months ended November 30,
2002, respectively, as compared to the same periods last year. The increases
were primarily the result of a 6% rise in voice grade equivalent dedicated lines
to 170,126. Strong growth in some segments of the carrier market has been offset
by the generally unsettled condition of the long distance, undersea fiber optic
and ISP markets.
Video services revenues of $12.0 million for the three months ended November 30,
2002 decreased slightly from the same period a year ago, reflecting the 15% loss
in subscribers, partially offset by additional revenue from a rate increase and
increased sales of premium services. Video services revenues of $24.7 million
for the six months ended November 30, 2002 grew 4% from the same period last
year, reflecting the revenue from the recent digital upgrade and the associated
rate increase.
Other revenue decreased $4.0 million, or 44% and $4.7 million or 29% to $5.0
million and $11.2 million for the three and six months ended November 30, 2002,
respectively, from the same periods last year. The decreases are primarily
attributable to a reduction in terminating international long distance minutes
to the Dominican Republic and a decrease in interconnection termination rates in
Puerto Rico.
Costs and expenses
Cost of services decreased $1.7 million, or 10% and $1.5 million, or 5% during
the three and six months ended November 30, 2002, respectively, as compared to
the same periods a year ago, primarily due to a decrease in access charges in
the Dominican Republic, resulting from the decrease in terminating international
long distance minutes described above.
Sales and marketing expenses decreased $1.3 million, or 35% and $2.4 million, or
33% during the three and six months ended November 30, 2002, respectively, as
compared to the three and six months ended November 30, 2001, primarily due to a
reduction of the sales force in the Dominican Republic and an overall reduction
in advertising spending.
General and administrative expenses increased $0.7 million, or 9% and $2.2
million, or 15% during the three and six months ended November 30, 2002,
respectively, as compared to the three and six months ended November 30, 2001,
primarily due to the additional expenses associated with the launching of the
video services business and increased costs to support the growing customer
base.
Adjusted EBITDA for the Caribbean Broadband operations for the three months
ended November 30, 2002 was $8.3 million, an increase of $1.6 million, or 23%,
as compared to the same three months last year. Adjusted EBITDA for the
Caribbean Broadband operations for the six months ended November 30, 2002 was
$18.1 million, an increase of $4.7 million, or 35%, as compared to the same six
months last year.
The $0.6 million non-cash charge relates to certain disputed billings that arose
in prior fiscal years, to and from the Puerto Rico Telephone Company. The
Company recorded this charge in the current quarter
30
in consideration of recent developments and continued protracted settlement
negotiations concerning these disputed billings.
Depreciation and amortization for the three months ended November 30, 2002 was
$11.0 million, a decrease of $2.3 million, or 17%, from the same three months
last year. Depreciation and amortization for the six months ended November 30,
2002 was $22.8 million, a decrease of $3.0 million, or 11%, from the same six
months last year. The decreases were primarily due to the cessation of
amortization relating to cable franchise costs in connection with the adoption
of SFAS No. 142. The effect of this adoption was partially offset by increased
depreciation expense associated with the continued expansion of the Puerto Rico
broadband and cable TV operations.
Operating loss for the three months ended November 30, 2002 was $3.3 million, a
decrease of $3.2 million as compared to the operating loss of $6.6 million for
the same period in fiscal 2002. Operating loss for the six months ended November
30, 2002 was $5.3 million, a decrease of $7.1 million as compared to the
operating loss of $12.4 million for the same period in fiscal 2002.
U.S. Wireless Operations
Three Months Ended Six Months Ended
--------------------- --------------------
(In thousands) 11/30/02 11/30/01 % Change 11/30/02 11/30/01 % Change
- -------------- -------- -------- -------- -------- -------- --------
Revenue:
Service revenue $ 63,433 $ 59,499 7% $ 129,198 $ 121,386 6%
Roaming revenue 19,353 22,964 (16) 44,132 48,922 (10)
Equipment sales 3,429 2,677 28 6,026 5,771 4
--------- --------- -- --------- --------- --
86,215 85,140 1 179,356 176,079 2
--------- --------- -- --------- --------- --
Costs and expenses:
Cost of equipment sold 7,311 8,942 (18) 13,421 17,041 (21)
Cost of services 15,009 17,360 (14) 32,449 36,210 (10)
Sales and marketing 11,228 12,909 (13) 22,889 24,402 (6)
General and administrative 13,056 13,862 (6) 25,928 28,122 (8)
--------- --------- -- --------- --------- --
46,604 53,073 (12) 94,687 105,775 (10)
--------- --------- -- --------- --------- --
Adjusted EBITDA 39,611 32,067 24 84,669 70,304 20
Loss (gain) on disposition of
assets 1 (4) 125 (3) (4) 25
Depreciation and amortization 9,401 11,397 (18) 18,638 22,514 (17)
--------- --------- -- --------- --------- --
Operating income $ 30,209 $ 20,674 46% $ 66,034 $ 47,794 38 %
========= ========= == ========= ========= ==
Revenue
U.S. Wireless service revenue increased $3.9 million, or 7% and $7.8 million, or
6%, to $63.4 million and $129.2 million, for the three and six months ended
November 30, 2002, respectively, as compared to the same periods last year. The
increases were primarily due to growth in revenue from new subscribers of $2.7
million and $7.1 million for the three and six months ended November 30, 2002,
respectively, and increases in service revenue per subscriber of $1.2 million
and $0.7 million for the same periods, as compared to the
31
same periods last year. Revenue from U.S. Wireless roaming decreased $3.6
million, or 16% and $4.8 million, or 10%, for the three and six months ended
November 30, 2002, respectively, from roaming revenues of $23.0 million and
$48.9 million for the three and six months ended November 30, 2001,
respectively. The decreases were primarily due to a decrease in roaming rates
per minute of $12.6 million and $20.9 million for the three and six months ended
November 30, 2002, respectively, partially offset by an increase in roaming
usage of $9.0 million and $16.1 million, respectively, for the same period.
We anticipate that roaming revenue will continue to be significantly lower in
fiscal 2003 than in fiscal 2002, primarily due to declines in contractual
roaming rates and, secondarily, industry consolidation. We expect the trend of
decreasing roaming rates per minute, partially offset by an increase in roaming
usage to continue.
Our U.S. Wireless operations had approximately 530,100 and 513,900 subscribers
at November 30, 2002 and 2001, respectively. During the twelve months ended
November 30, 2002, increases from new activations of 152,900 were offset by
subscriber cancellations of 136,700. The monthly prepaid and postpaid churn rate
was 2.2% and 2.3% for the three months and six months ended November 30, 2002,
respectively, as compared to 2.3% and 2.5% for the same periods last year. The
cancellations experienced by the U.S. Wireless operations were primarily due to
competitive factors and non-payment.
U.S. Wireless revenue per subscriber per month, based upon an average number of
subscribers, was $54 and $56 for the three and six months ended November 30,
2002, respectively, as compared to $56 and $58 for the same periods a year ago.
The decreases in revenue per subscriber were primarily due to the decline in
roaming revenue. Average minutes of use per subscriber was 254 per month for the
three months ended November 30, 2002 as compared to 183 for the same period last
year.
Costs and expenses
Cost of equipment sold decreased $1.6 million, or 18% and $3.6 million, or 21%
for the three and six months ended November 30, 2002, respectively, as compared
to the same periods last year, due to a decrease in activations partially offset
by a an increase in the number of phones given to customers for retention.
Cost of services decreased $2.4 million, or 14% and $3.8 million, or 10% for the
three and six months ended November 30, 2002, respectively, as compared to the
three and six months ended November 30, 2001, primarily due to a decrease in
incollect costs due to long term contracts at more favorable rates. Incollect
costs are the costs associated with our subscribers roaming in other markets.
Sales and marketing expenses decreased $1.7 million, or 13% and $1.5 million, or
6% for the three and six months ended November 30, 2002, respectively, as
compared to the prior year, primarily due to a reduction in the sales force and
lower commissions relating to lower activations.
General and administrative expenses decreased $0.8 million, or 6% and $2.2
million, or 8% during the three and six months ended November 30, 2002,
respectively, as compared to the three and six months ended November 30, 2001,
primarily due to decreases in bad debt expense, subscriber billing services and
subscription fraud.
Adjusted EBITDA for the U.S. Wireless operations was $39.6 million for the three
months ended November 30, 2002, an increase of $7.5 million, or 24%, as compared
to the same period in fiscal 2002.
32
Adjusted EBITDA for the U.S. Wireless operations was $84.7 million for the six
months ended November 30, 2002, an increase of $14.4 million, or 20%, as
compared to the same period in fiscal 2002.
Depreciation and amortization for the three months ended November 30, 2002 was
$9.4 million, a decrease of $2.0 million, or 18%, from the same period in fiscal
2002. Depreciation and amortization for the six months ended November 30, 2002
was $18.6 million, a decrease of $3.9 million, or 17%, from the same period in
fiscal 2002. The decreases were primarily due to the cessation of amortization
relating to wireless licenses in connection with the adoption of SFAS No. 142.
Operating income for the three months ended November 30, 2002 was $30.2 million,
an increase of $9.5 million from operating income of $20.7 million for the same
period in fiscal 2002. Operating income for the six months ended November 30,
2002 was $66.0 million, an increase of $18.2 million from operating income of
$47.8 million for the same period in fiscal 2002.
Consolidated
Other non-operating income and expenses
Net interest expense was $37.0 million and $75.3 million for the three and six
months ended November 30, 2002, respectively, a decrease of $1.1 million, or 3%
and $0.8 million, or 1%, from the three and six months ended November 30, 2001.
Gross interest expense was $37.4 million and $75.9 million for the three and six
months ended November 30, 2002, as compared to $38.4 million and $76.6 million
for the same periods a year ago. The decreases were primarily driven by a lower
average interest rate on our variable rate debt. The decreases were partially
offset by the change in interest rate on our Mezzanine Debt from 10% cash pay to
13% paid-in-kind (see Commitments and Contingencies). Total debt decreased $35.4
million from November 30, 2001 to November 30, 2002.
The weighted-average debt outstanding during the three months ended November 30,
2002 was $1,762.8 million, a decrease of $36.2 million as compared to the
weighted-average debt level of $1,799.0 million during the three months ended
November 30, 2001. The weighted-average debt outstanding during the six months
ended November 30, 2002 was $1,784.0 million, a decrease of $12.6 million as
compared to the weighted-average debt level of $1,771.4 million during the six
months ended November 30, 2001. Our weighted-average interest rate was 8.5% for
both the three and six months ended November 30, 2002, as compared to 8.5% and
8.7% for the same periods a year ago.
After minority interest in loss of subsidiaries for the three and six months
ended November 30, 2002, pre-tax loss was $6.2 million and $2.7 million as
compared to the pre-tax loss of $13.2 million and $18.3 million for the three
and six months ended November 30, 2001.
Income tax expense was $7.2 million and $11.0 million for the three and six
months ended November 30, 2002, respectively as compared to $7.1 million and
$10.8 million for the same periods last year. The Company had a negative
worldwide effective tax rate of 382.2% for the six months ended November 30,
2002 primarily as a result of pre-tax book losses generated in the Dominican
Republic for which the Company cannot record a tax benefit and certain interest
expense related to the Company's Mezzanine Debt that is not deductible for U.S.
income tax purposes.
These factors resulted in a net loss of $13.5 million and $13.7 million for the
three and six months ended November 30, 2002, respectively, which represent
decreases of $6.9 million and $15.3 million, respectively, from net losses of
$20.3 million and $29.0 million for the same periods a year ago.
33
LIQUIDITY AND CAPITAL RESOURCES
On September 5, 2001, we amended our existing senior term loan and revolving
credit facilities to add an additional $50.0 million to the Tranche-C term loan.
The amended credit facilities are referred to as the "New Credit Facility". The
New Credit Facility consists of four term loans in an aggregate original
principal amount of $1,050.0 million, which has been reduced to $983.6 million
as of November 30, 2002 due to mandatory debt amortization payments. The
borrowers under the New Credit Facility are Centennial Cellular Operating Co.
LLC for a term loan with an original amount of $325.0 million, of which $292.5
million was outstanding as of November 30, 2002, and Centennial Puerto Rico
Operations Corp. for three separate term loans aggregating an original amount of
$725.0 million, of which $691.1 million was outstanding as of November 30, 2002.
The New Credit Facility also includes a revolving credit facility with an
aggregate principal amount of $250.0 million, of which $200.0 million was
outstanding as of November 30, 2002. The revolving credit facility portion of
the New Credit Facility is available to both of the borrowers. Under the
provisions of the New Credit Facility, we are effectively prohibited from paying
cash dividends on our common stock. Our obligations under the New Credit
Facility are guaranteed by substantially all of our subsidiaries and are
collateralized by liens on substantially all of our assets.
For the six months ended November 30, 2002, earnings were less than fixed
charges by $3.0 million. Fixed charges consist of interest expense, including
amortization of debt issuance costs, and the portion of rents deemed
representative of the interest portion of leases. The amount by which earnings
were less than fixed charges reflects non-cash charges of $71.1 million relating
to depreciation and amortization.
As of November 30, 2002, we had $694.1 million of property, plant and equipment
(net) placed in service. During the six months ended November 30, 2002, we made
capital expenditures of $67.5 million to expand the coverage areas and upgrade
our cell sites as well as our call switching equipment of existing Caribbean and
U.S. wireless properties and to extend and enhance our broadband fiber network
in the Caribbean. Capital expenditures for the Caribbean operations were $49.3
million for the six months ended November 30, 2002, representing 73% of total
capital expenditures. The Caribbean operations' capital expenditures included
$25.4 million to add capacity and services and to continue the development and
expansion of our Caribbean Wireless systems and $23.9 million to continue the
expansion of our Caribbean Broadband network infrastructure. During fiscal 2003,
we anticipate capital expenditures of no more than $150.0 million.
In January 2002, Centennial Puerto Rico Cable TV Corp. ("Centennial Cable"), our
wholly-owned subsidiary, entered into a $15.0 million credit agreement with
Banco Popular de Puerto Rico (the "Cable TV Credit Facility") to fund the
digital conversion of its cable operations. Borrowings under the Cable TV Credit
Facility bear interest at LIBOR plus 3.50%. The Cable TV Credit Facility matures
in February 2006 with principal repayments beginning in August 2002. Under the
Cable TV Credit Facility, Centennial Cable is required to maintain certain
financial covenants and is limited in its ability to, among other things, incur
additional indebtedness. Centennial Puerto Rico Operations Corp. has guaranteed
Centennial Cable's obligation under the Cable TV Credit Facility and the
facility is collateralized by a lien on the digital boxes, the monthly rental
payments on the digital boxes and other equipment purchased with the borrowings
under the Cable TV Credit Facility. As of November 30, 2002, $13.6 million was
outstanding under the Cable TV Credit Facility.
We expect to finance our capital expenditures primarily from cash flow generated
from operations, borrowings under our existing credit facilities and proceeds
from the sale of assets. We may also seek various other sources of external
financing including, but not limited to, additional bank financing, joint
ventures, partnerships and issuance of debt or equity securities.
34
To meet our obligations with respect to our operating needs, capital
expenditures and debt service obligations, it is important that we continue to
improve operating cash flow. Increases in revenue will be dependent upon, among
other things, continued growth in the number of customers and maximizing revenue
per subscriber. We have continued the construction and upgrade of wireless
systems in our markets to achieve these objectives. There is no assurance that
growth in customers or revenue will occur. In addition, our participation in the
Caribbean telecommunications business has been, and is expected to remain,
capital intensive. Further, due to the start-up nature of our Dominican Republic
operations, we anticipate that additional cash investments will be required to
fund our operations over the next several years.
The following table sets forth, for the periods indicated, our net cash provided
by operating activities before interest payments (net cash provided), our
principal uses of such cash and the cash required from other financing and
investing activities:
Six Months Ended November 30,
-----------------------------------------------------------
2002 2001
---------------------------- ---------------------------
% of net cash % of net cash
(In thousands) Amount provided Amount provided
- -------------- ---------- ------------- --------- -------------
Net cash provided by operating activities $ 96,054 63 % $ 25,263 27 %
Interest paid 55,791 37 67,477 73
---------- ------- --------- -----
Net cash provided $ 151,845 100 % $ 92,740 100%
========== ======= ========= =====
Principal uses of cash:
Interest paid $ 55,791 37% $ 67,477 73 %
Property, plant & equipment 67,518 44 130,767 141
---------- ------- --------- -----
Total $ 123,309 81% $ 198,244 214 %
========== ======= ========= =====
Cash available for (required from) other
financing and investing activities $ 28,536 19% $(105,507) (114)%
========== ======= ========= =====
Net cash provided by operating activities for the six months ended November 30,
2002 was sufficient to fund our expenditures for property, plant and equipment
of $67.5 million.
The following table sets forth the primary cash flows (used in) provided by
other financing and investing activities for the periods indicated:
Six Months Ended November 30,
------------------------------------
(In thousands) 2002 2001
- -------------- --------- ----------
Proceeds from disposition of assets, net of cash expenses $ 7,540 $ 43
Proceeds from issuance of long-term debt 27,173 146,055
Proceeds from the exercise of stock options -- 1,414
Capital contributed from minority interests in subsidiaries -- 2,450
Distributions received from equity investments 48 43
Proceeds from issuance of common stock under employee stock purchase plan 483 1,898
--------- ---------
Cash provided by other financing and investing activities 35,244 151,903
--------- ---------
Repayment of debt (47,169) (41,624)
Debt issuance costs paid -- (4,000)
Deposits on long-term assets -- (15,000)
--------- ---------
Capital (required from) available for operations and
capital expenditures $ (11,925) $ 91,279
========= =========
35
Based upon existing market conditions and our present capital structure, we
believe that cash flows from operations and funds from currently available
credit facilities will be sufficient to enable us to meet required cash
commitments through the next twelve-month period.
Centennial, its subsidiaries, affiliates and controlling stockholders (including
Welsh, Carson, Anderson & Stowe and The Blackstone Group and their respective
affiliates) may from time to time, depending upon market conditions, seek to
purchase certain of Centennial's or its subsidiaries' securities in the open
market or by other means, in each case to the extent permitted by existing
covenant restrictions.
ACQUISITIONS AND DISPOSITIONS
Our primary acquisition strategy is to obtain controlling ownership interests in
communications systems serving markets that are proximate to or share a
community of interest with our current markets. We may pursue acquisitions of
communications businesses that we believe will enhance our scope and scale. Our
strategy of clustering our operations in proximate geographic areas enables us
to achieve operating and cost efficiencies as well as joint marketing benefits,
and also allows us to offer our subscribers more areas of uninterrupted service
as they travel. In addition to expanding our existing clusters, we also may seek
to acquire interests in communications businesses in other geographic areas. The
consideration for such acquisitions may consist of shares of stock, cash,
assumption of liabilities, a combination thereof or other forms of
consideration.
In August 2002, we entered into an agreement to sell our 60% interest in
Infochannel Limited, a Jamaican Internet service provider, for $3.0 million, of
which $1.0 million has been received as of August 31, 2002. This transaction is
expected to close by the end of fiscal year 2003.
In August 2002, we sold our 51% interest in our Jamaica wireless operations,
Centennial Digital Jamaica, to Oceanic Digital Communications Inc., the 49%
shareholder of Centennial Digital Jamaica. We recorded a pre-tax gain of $2.4
million, which is included in gain on disposition of assets in the consolidated
statement of operations. In addition, we reduced our net liabilities by
approximately $2.4 million, including consolidated long-term debt by
approximately $45.1 million (largely comprised of the vendor financing credit
facility with Lucent Technologies, which was non-recourse to the Company) as a
result of this transaction.
During the three months ended November 30, 2002, the Company sold 41 towers to
AAT in a sale-leaseback transaction for approximately $6.5 million. The $3.9
million gain recorded on these sales has been deferred and will be recognized
over the lives of the related capitalized leases.
RECENT ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. We are required to implement SFAS No. 143 on June
1, 2003, and have not yet determined the impact that this statement will have on
our results
36
of operations or financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and establishes accounting and reporting standards for long-lived assets to
be disposed of by sale. This standard applies to all long-lived assets,
including discontinued operations. SFAS No. 144 requires that those assets be
measured at the lower of carrying amount or fair value less cost to sell. SFAS
No. 144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity that will be eliminated from the ongoing operations of the entity
in a disposal transaction. We adopted SFAS No. 144 on June 1, 2002. The adoption
of this statement did not have a material effect on our results of operations,
financial position and cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Statement No. 145 provides for the rescission of several previously issued
accounting standards, new accounting guidance for the accounting for certain
lease modifications and various technical corrections that are not substantive
in nature to existing pronouncements. We adopted SFAS No. 145 on June 1, 2002.
The adoption of this statement did not have a material effect on our results of
operations, financial position and cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by SFAS No. 146 include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002, with early application encouraged. We have not yet determined the
impact that this standard will have on our results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 serves as an amendment to
SFAS No. 123, "Accounting for Stock-Based Compensation", and provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As required by SFAS No. 148, we will adopt the
transition elements and annual financial statement reporting requirements for
the current fiscal year ending May 31, 2003. We will adopt the interim periods
reporting disclosure requirements of SFAS No. 148 during the interim period
ending August 31, 2003. We have not yet determined the impact that this standard
will have on its results of operations or financial position.
COMMITMENTS AND CONTINGENCIES
We have filed a shelf registration statement with the Securities and Exchange
Commission for the sale of up to 72,000,000 shares of our common stock that may
be offered from time to time in connection with acquisitions. The SEC declared
the registration statement effective on July 14, 1994. As of January 10,
37
2003, 37,613,079 shares remain available for future acquisitions.
On July 7, 2000, the SEC declared effective our universal shelf registration
statement, which registered our sale of up to an aggregate of $750.0 million of
securities (debt, common stock, preferred stock and warrants) as well as the
resale of up to 20 million shares of our common stock out of approximately 87
million shares owned by our controlling stockholders (Welsh, Carson, Anderson
and Stowe and an affiliate of The Blackstone Group).
In August 2002, Welsh, Carson, Anderson and Stowe ("WCAS") advised us that
during the quarter ended August 31, 2002, an affiliate of WCAS (the "WCAS
Affiliate") purchased in open market transactions approximately $140.0 million
principal amount of our 10-3/4% senior subordinated notes due 2008 (the
"Notes"). During the quarter ended November 30, 2002, the WCAS Affiliate advised
the Company that it purchased an additional $13.0 million principal amount of
the Notes. Together with previous purchases, the WCAS Affiliate holds $189.0
million of principal amount of the Notes as of November 30, 2002. On September
24, 2002, the Company and the WCAS Affiliate entered into an indemnification
agreement pursuant to which the WCAS Affiliate agreed to indemnify us in respect
of taxes which may become payable by us as a result of these purchases.
Therefore, we recorded a $15.9 million income tax payable included in accrued
expenses and other current liabilities, and a corresponding amount due from the
WCAS Affiliate that is included in prepaid expenses and other current assets.
We have been informed by the administrative agent under the New Credit Facility
that, as of May 31, 2002, we had used up all remaining baskets under the New
Credit Facility to pay cash interest on the Mezzanine Debt and that any
additional payments of cash interest on the Mezzanine Debt would be considered a
default under the New Credit Facility. Accordingly, we are effectively
prohibited from making any further payments of cash interest on the Mezzanine
Debt, absent additional distributions from the equity investments in wireless
systems that we hold. As such, we are recording paid-in-kind interest at a rate
of 13% per annum, which increases the principal amount of the Mezzanine Debt.
Interest amounts for future periods are calculated on these higher principal
amounts. Any unpaid interest will be repaid upon maturity of the Mezzanine Debt.
In May 2002, we announced that we entered into an agreement with AAT
Communications Corp. ("AAT") to sell to AAT 186 telecommunications towers
located in our U.S. wireless serving areas for a purchase price of approximately
$34.1 million in cash, subject to adjustment. Under the terms of the agreement,
we will leaseback space on the towers from AAT. The agreement is subject to
customary closing conditions and the tower sales are expected to close on a
rolling basis during the remainder of fiscal year 2003. During the three months
ended November 30, 2002, we sold 41 towers to AAT in a sale-leaseback
transaction for approximately $6.5 million. The $3.9 million gain recorded on
these sales has been deferred and will be recognized over the lives of the
related capitalized leases.
In July 2001, we entered into an agreement with Nortel Networks pursuant to
which we agreed, subject to certain conditions, to purchase equipment and
installation services for our wireless operations through June 2003 at a cost of
approximately $40.0 million. We have committed to purchase $30.9 million under
this agreement as of November 30, 2002.
We recently entered into multi-year roaming agreements with Cingular Wireless
and AT&T Wireless for analog, TDMA and GSM traffic. Under these agreements, we
are required to overlay our existing U.S. wireless network with a GSM network
over the next three years. We expect the GSM overlay will require incremental
expenditures, above our historical U.S. wireless capital expenditure levels, of
38
approximately $20 million to $40 million over the next three years and are in
the process of selecting a vendor or vendors to provide the necessary equipment
and services.
SUBSEQUENT EVENTS
As previously announced, we received a Staff Determination letter from Nasdaq
stating that our common stock faces delisting from the Nasdaq National Market
because it had traded below the minimum bid price of $3.00 for 30 consecutive
trading days. On December 12, 2002, we had an oral hearing before a Nasdaq
Listing Qualification Panel to appeal the Staff Determination. Pending the
Panel's decision, our common stock will continue to trade on the Nasdaq National
Market. There can be no assurance that the Panel will grant our request for
continued listing on the Nasdaq National Market. If our appeal is unsuccessful,
we intend to apply to transfer the listing of our common stock to the Nasdaq
SmallCap Market. We currently meets the Nasdaq SmallCap Market's maintenance
criteria.
On November 18, 2002, we commenced a tender offer to certain of our employees to
exchange certain stock options to purchase shares of our common stock having an
exercise price of $12.15 per share or more for new stock options to purchase
shares of our common stock upon the terms and subject to the conditions
described in an Offer to Exchange filed with the SEC. Stock options covering
approximately 3,509,600 shares were eligible for exchange pursuant to the terms
of the Offer to Exchange. The tender offer expired on December 19, 2002.
Pursuant to the Offer to Exchange, we have accepted for cancellation stock
options to purchase 2,913,700 shares of our common stock. In accordance with the
terms and subject to the conditions of the Offer to Exchange, holders of
cancelled stock options will have the right to receive new stock options
covering 1,456,850 shares of common stock in the aggregate. We expect to issue
the new stock options on or about June 23, 2003.
On December 20, 2002, we sold 39 telecommunications towers in a sale-leaseback
transaction to AAT for approximately $6.8 million. The $4.4 million gain
recorded on this sale will be deferred and recognized over the lives of the
related capitalized leases.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Statements in this document that are not historical facts are hereby identified
as "forward looking statements". Where, in any forward-looking statement, we or
our management expresses an expectation or belief as to future results or
actions, there can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished. Our actual results may differ
significantly from our expectations, plans or projections. Forward-looking
statements can be identified by the use of words "believe", "expect",
"estimate", "anticipate", "project", "intend", "may", "will", and similar
expressions, or by discussion of competitive strengths or strategy that involve
risks and uncertainties. We warn you that these forward-looking statements are
only predictions and estimates, which are inherently subject to risks and
uncertainties.
Important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, us
include, but are not limited to:
- - our substantial debt obligations;
39
- - the availability and cost of additional capital to fund our operations,
including the need to refinance and/or amend existing indebtedness;
- - restrictive covenants and consequences of default contained in our
financing arrangements, which limit how we conduct business;
- - the competitive nature of the telecommunications industry in the areas
in which we operate, including, without limitation, the effect of
existing and new competitors, including competitors that may have
greater resources than we do, competitors that may offer less expensive
products than we do and competitors that may offer more technologically
advanced products than we do;
- - market prices for wireless services may continue to decline in the
future;
- - general economic, business, political and social conditions in the
areas in which we operate, including the less developed Caribbean
region;
- - fluctuations in currency values;
- - continued overbuilding by personal communications service providers in
our U.S. wireless markets and the effects of increased competition in
our markets, which may cause a reduction in roaming revenues, increased
subscriber cancellations, a continued reduction of prices charged and
lower average revenue per subscriber;
- - our dependence on roaming agreements for a material portion of our U.S.
wireless revenues and the continued price declines in roaming rates and
potential reduction of roaming minutes of use;
- - the ability to attract and retain qualified personnel;
- - that our coverage areas are not as extensive as those of other wireless
operators which may limit our ability to attract and retain customers;
- - the effects of consolidation in the wireless communications industry;
- - the effects of governmental regulation of the telecommunications
industry;
- - the capital intensity of the telecommunications industry, including our
plans to make significant capital expenditures during the coming year
and future years to build out and upgrade our networks and the
availability of additional capital to fund these capital expenditures;
- - declining rates for international long distance traffic;
- - opportunities for growth through acquisitions and investments and
ability to manage this growth;
- - changes and developments in technology, including our ability to
upgrade our networks to remain competitive and our ability to
anticipate and react to frequent and significant technological changes;
- - the ability to effectively manage subscriber cancellations;
- - local operating hazards and risks in the areas in which we operate,
including without limitation, hurricanes, tornados, wind storms and
other natural disasters;
- - our ability to manage and monitor billing and operational support
systems;
- - potential litigation related to using wireless telephones while
operating an automobile and the potential reduction of wireless usage
due to legislation restricting usage while driving;
- - potential litigation relating to possible health effects of radio
frequency transmission;
- - the relative illiquidity and corresponding volatility of our common
stock;
- - control by certain of our stockholders and anti-takeover provisions;
and
- - other factors referenced in our filings with the Securities and
Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue reliance on
these forward-looking statements. We undertake no obligation to update or revise
these forward-looking statements to reflect events, developments or
circumstances after the date hereof.
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks due to fluctuations in interest
rates. A majority of the Company's long-term debt has variable interest
rates. The Company utilizes interest rate swap and collar agreements to
hedge variable interest rate risk on a portion of its variable interest
rate debt as part of its interest rate risk management program.
The table below presents principal (or notional) amounts and related
average interest rate by year of maturity for the Company's long-term debt
and interest rate swap and collar agreements. Weighted average variable
rates are based on implied forward rates in the yield curve as of November
30, 2002:
===================================================================================================================================
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------
THERE-
(IN THOUSANDS) 2003 2004 2005 2006 2007 AFTER TOTAL FAIR VALUE
===================================================================================================================================
Long-term debt:
Fixed rate $ 1,256 $ 1,272 $ 1,433 $ 866 $ 832 $559,593 $ 565,252 $ 385,802
Average interest rate 10.56% 10.52% 10.35% 9.90% 10.00% 10.50% 10.49% --
Variable rate $ 77,256 $99,756 $122,256 $343,319 $554,594 -- $1,197,181 $1,197,180
Average interest rate (1) 1.70% 3.17% 4.22% 4.72% 5.17% -- 3.77% --
Interest rate swaps
(pay fixed, receive
variable):
Notional amount $100,000 $50,000 -- -- -- -- -- $ (7,779)
Average pay rate 5.60% 5.24% -- -- -- -- -- --
Average receive rate 1.70% 3.17% -- -- -- -- -- --
Interest rate collar:
Notional amount $100,000 -- -- -- -- -- -- $ (3,449)
Cap 7.00% -- -- -- -- -- -- --
Floor 4.62% -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents the average interest rate before applicable margin on the
New Credit Facility debt.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them
to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2002, WHTV Broadcasting Corp. and Sala Foundation
Inc., operators of a wireless cable system in Puerto Rico,
filed an action against the Company in the United States
District Court for the District of Puerto Rico. The complaint
alleges that the Company breached the terms of a November 2000
letter of intent to purchase the wireless cable system for $30
million. The complaint seeks specific performance of the
letter of intent or not less than $15 million in damages.
While it is not possible to determine the ultimate disposition
of this matter, the Company believes that the outcome will not
have a material adverse effect on its financial condition or
results of operations. To the Company's knowledge, there are
no other material pending legal proceedings to which the
Company or its subsidiaries are a party or of which any of the
Company's property is subject that is likely to have a
material adverse effect on its business or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's annual meeting of shareholders was held on
October 3, 2002.
b) The following persons were elected as directors at the
Company's annual meeting pursuant to the following
votes:
Number of Votes
---------------
Directors For Against
--------- --- -------
Carmen A. Culpeper 92,593,646 581,431
Anthony J. de Nicola 92,278,248 896,829
Mark T. Gallogly 93,075,396 99,681
James R. Matthews 92,829,696 345,381
Thomas E. McInerney 92,759,998 415,079
Michael J. Small 92,907,373 267,704
David M. Tolley 93,075,396 99,681
J. Stephen Vanderwoude 92,593,646 581,431
c) The shareholders approved a proposal at the annual
meeting to ratify the selection by the Board of
Directors of Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year ending May
31, 2003. The following sets forth the number of votes
on this proposal:
42
For Against Abstain
--- ------- -------
93,031,975 139,358 3,744
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Each exhibit identified below is filed as a part of this
report.
a) Exhibits
Exhibit No. Description
----------- -----------
10.17 Severance Agreement and General Release
dated as of September 1, 2002 between
Centennial Communications Corp. and
Peter W. Chehayl
99.1 Certification of Michael J. Small,
Principal Executive Officer
99.2 Certification of Thomas J. Fitzpatrick,
Principal Financial Officer
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
January 14, 2003
CENTENNIAL COMMUNICATIONS CORP.
/s/ Thomas J. Fitzpatrick
-------------------------------
Thomas J. Fitzpatrick
Executive Vice President,
Chief Financial Officer
(Chief Financial Officer)
43
/s/ Thomas E. Bucks
-------------------------------
Thomas E. Bucks
Sr. Vice President-Controller
(Chief Accounting Officer)
44
CERTIFICATION
I, Michael J. Small, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Centennial
Communications Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: January 14, 2003
By: /s/ Michael J. Small
--------------------
Name: Michael J. Small
Title: Chief Executive Officer
CERTIFICATION
I, Thomas Fitzpatrick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Centennial
Communications Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: January 14, 2003
By: /s/ Thomas J. Fitzpatrick
-------------------------
Name: Thomas J. Fitzpatrick
Title: Chief Financial Officer